SPIEGEL ONLINE

03/23/2011 06:04 PM

Winds of Change

Will Nuke Phase-Out Make Offshore Farms Attractive?

Sudden fears about nuclear power are causing Germany's government to hasten efforts toward green energy. An unpublished plan calls for a major boost in support for offshore wind farms, but the plan's financing arrangement would mean that any profits enjoyed by companies and banks would come at consumers' expense.

In the wake of the ongoing nuclear crisis in Japan, Germany's federal government is working on a new plan for increasing energy efficiency and for the use of renewable energies, with a particular focus on offshore wind farms.

According to information obtained by SPIEGEL ONLINE, under the plan massive turbines will be erected far away from the coastlines, where the wind blows more consistently than it does on land, and where the turbines' enormous rotor blades won't bother the inhabitants. The plan aims to decrease the country's dependence on energy derived from coal and nuclear power plants.

But the wind-energy industry has recently gone through some hard times. In 2008, a record number of wind turbines, with a capacity of 11 gigawatts, were installed in Europe. But, after that, a
dramatic decline in demand ensued. Investors lost all hope that the industry would see further growth. Although the German Environment Ministry and the wind sector had proclaimed it the energy market of the future, the offshore sector made headlines for technical problems and financial scandals.

Now, suddenly, a gold-rush-like feverishness to support wind energy appears to be taking shape. The accident at Japan's Fukushima I nuclear power plant has triggered an aggressive debate in Germany about phasing-out nuclear energy. Politicians and lobbyists are scrambling to come up with the best plan for
rapidly expanding the use of renewable energies.

The federal government hopes to increase the amount of energy coming from renewable sources, as a percentage of all energy generated, from 17 percent to 40 percent, and it foresees most of this increase coming from huge offshore wind farms. By the end of the current decade, government officials hope to have wind turbines on the high seas generating 10,000 megawatts per year -- enough to cover about one-eighth of peak demand in Germany. "Offshore (wind energy) is the technology that runs up against the least political resistance," says Thomas Goppel, a former state environment minister for Bavaria.

A Financial Injection for Wind Energy

Still, the government has to make up for some major failures. In recent years, very little progress has been made with wind farms at sea. "The expansion of offshore wind energy is massively behind schedule," says Hermann Albers, president of the German Wind Energy Association (BWE).

But now those projects that have already been planned are going to be fast-tracked. According to a draft paper outlining the main points of the project made available to SPIEGEL ONLINE, the government is planning the following measures to accomplish this goal:

a financing package, including venture capital, from Germany's KfW state development bank,

optimized planning of the power lines connecting the deep-sea wind farms with the mainland, and

shorter, but therefore higher, feed-in tariffs for the energy fed into the power grid from the wind farms.

None of these measures are new. Germany's ruling coalition only plans to back the list of measures it included in the energy plan it
proposed in September 2010. At that time, one element in the plan involved promoting the construction of 10 offshore wind farms with 5 billion ($7.1 billion) in low-interest loans made available from the KfW. Some thought was also given to a unique program for financing special ships that would be crucial for erecting wind farms on the open sea.

There was also already discussion of shorter, and therefore higher, feed-in tariffs for offshore wind energy. According to information obtained by SPIEGEL ONLINE, the government plans to raise the feed-in tariff paid to the operators of offshore wind farms from 0.15 to 0.18 per kilowatt hour (kWh). In return for this higher rate, the subsidy's duration will be pared down from 14 months to nine months. The energy industry, at least, is adamant about this last point.

This would entail the second increase in subsidies for offshore wind energy within just a few years' time. For their electricity, wind farm operators would receive more than three times the going rate for energy on spot markets.

Risky Investments

Those who argue for these increased subsidies believe it will encourage banks to help finance capital-intensive offshore projects. The management consulting firm KPMG estimates that profits for the operators of offshore wind farms would rise from about
7 percent today to up to 12 percent.

But although this would be a boon for investors, it would only mean additional costs for consumers over the long term. The electricity lobby argues that the money companies would get upfront from the higher subsidy rate would leave the total cost to the government and taxpayers unchanged due to its shorter duration. But the money for these wind-energy subsidies comes from surcharges on the utility bills of German households, known as a Renewable Energy Act (EEG) assessment. Since that money would be taken out of consumer pockets and put into company pockets earlier, the latter would reap the benefits of having that capital on hand.

Likewise, the guarantee of higher profits does not reduce the massive risks investors assume in setting up an offshore wind farm. "Building a wind farm often gobbles up more than a billion euros," Albers says. For investors, insecure terms are often the rule. The technology has yet to be proven. In recent years, major electric utility companies, such as E.on, RWE and Vattenfall, and smaller builders of wind-turbine facilities have been forced to suffer a number of setbacks.

One of the major problems for Germany companies trying to set up offshore wind farms is that they have to be located so far from the coastline. In order to protect fragile wetland ecosystems and keep the tourism industry from mounting any protests, the federal government requires a buffer zone of at least 30 kilometers (19 miles) from the shoreline, which is considerably larger than those required by other EU member states. In these regions, the seafloor can lie up to 40 meters (131 feet) below the surface.

Connection Problems

Wind-farm builders are currently erecting towers on the swelling sea that are 150 meters tall and weigh several thousand tons. To do so, they first had to develop ships that could position highly sensitive rotors and nacelles weighing tons with extreme precision while withstanding waves several meters high themselves. Storms and cold weather have often caused the work to be interrupted. Projects such as the Bard I wind farm in the North Sea have seen their estimated finish date pushed back several times.

What's more, the manufacturers of offshore wind farms often have a hard time getting a guarantee that their facility will be connected to the power grid soon after it has been completed. In fact, they are often stuck in a Catch-22 situation: Although operators of the power grid are legally obligated to connect the wind farms, they often won't guarantee a connection until the wind-farm projects have secured their financing. And the banks often want to see a connection guarantee before they agree to extend any financing.

"The government has made an effort to come to grips with this problem," Albers says. "But, so far, with only modest success." For example, although Baltic 1, Germany's first wind farm in the Baltic Sea, was completed in the fall of 2010, it wasn't able to secure a connection to the power grid until January 2011.

Boon for Some, Bust for Others

In the short term, at least, low-interest loans from the KfW and higher subsidies are hardly going to solve these kinds of problems. For this reason, Albers is skeptical about the government's new announcements. "The government is trying to sell the expansion of offshore wind energy as a miracle solution for its nuclear phase-out," he says. "But it is still going to be a few years before the technology can deliver significant amounts of energy. If you want to have a rapid expansion of green energy, it would be more efficient to have new land-based wind farms. There are still several regions that would be suitable for onshore projects, particularly in southern Germany."

Even so, the banks that have often balked at loaning money for offshore wind farms can look forward to an investment boom. Small and medium-sized companies and public utility companies, on the other hand, might be hurting for cash. Such a lack of funding caused the financing plan for Bard I, Germany's largest wind farm, to be put on ice since the summer of 2010.

In 2008, consortia made up of more than 100 public utility companies guaranteed HypoVereinsbank, the project's primary lender, that they would take over the costs of the 400-megawatt giant wind farm. Since the summer of 2010, however, a financing decision on the 1.5 billion ($2.13 billion) project has been pushed back several times.

Given recent events in Japan, there are now rumors that HypoVereinsbank might void its current contracts with the public utility companies and sell the Bard project to the highest bidder, now that it suddenly might be attractive again. Boris Palmer, head of the supervisory board of one of the consortia of public utility companies, would neither confirm nor deny the rumors. Instead, he simply says: "We continue to assume that existing contracts will be honored."